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Improving Your Value Investing

Is the fear of losing your hard earned money keeping you away from value investing? You might have experienced a loss despite picking undervalued stocks through several familiar valuation metrics/methods. You can greatly improve the odds in your favor by adding earnings momentum to your stock selection framework.

It’s not very difficult. After finding stocks that meet your ‘value’ standard, you have to make sure that they are also experiencing upward earnings revisions. You greatly minimize the risk of losing money by picking ‘value’ stocks that have positive earnings momentum.

Analysts covering a particular stock often increase/decrease their earnings estimates based on certain developments at the company, or sometimes due to the sector or economy-related factors. They do it after their extensive evaluation on the fundamentals of the company. When the earnings estimate of a stock increases faster than its price over a period of time, it is considered undervalued. It indicates that the stock will move higher in the coming days, tracking the trend in estimate revisions.

Keep in mind, however, that positive earnings momentum for stocks with a very small number of analyst coverage could be misleading as there are chances of over-representation from an extremely optimistic view. So, stocks covered by a number of analysts (at least three) would be a safer bet.

Make Things Easier with the Zacks Rank

If you face difficulty in identifying the stocks with solid earnings momentum, looking at the Zacks Rank would help you narrow down your options.

While you will find a number of undervalued stocks based on the above strategy, we believe the following three would be good additions. But don't stop with just these three -- continue exploring your options.

TravelCenters of America LLC (TA): With a market capitalization of $158.5 million, it is a full-service national travel center chain in the U.S., with nationwide locations serving hundreds of thousands of professional drivers and other highway travelers each month – including virtually all major trucking fleets.

Zacks #1 Rank (Strong Buy)

P/E Ratio = 4.22; P/B Ratio = 0.47

Change in current year estimate (last 4 weeks): 10.77%

Change in price (last 4 weeks): 2.61%

Number of analysts providing estimates: 3

Collective Brands, Inc. (PSS): This company is engaged in the provision of footwear and related accessories worldwide. It operates stores of Payless ShoeSource, the largest specialty family footwear retailer in the Western Hemisphere. The company holds a market capitalization of $1.3 billion.

Zacks #1 Rank (Strong Buy)

P/E Ratio = 14.19; P/B Ratio = 1.82

Change in current year estimate (last 4 weeks): 9.05%

Change in price (last 4 weeks): 0.18%

Number of analysts providing estimates: 3

HollyFrontier Corporation (HFC): It operates as an independent petroleum refiner and marketer in the U.S. It produces light products diesel fuel, jet fuel, specialty lubricant products, liquefied petroleum gas, fuel oil, and specialty and modified asphalt. The company holds a market capitalization of $8.1 billion.

Zacks #2 Rank (Buy)

P/E Ratio = 5.98; P/B Ratio = 1.39

Change in current year estimate (last 4 weeks): 4.90%

Change in price (last 4 weeks): 0.20%

Number of analysts providing estimates: 15

Keep Track of Changes

Using the power of earnings momentum is no doubt a smart and easy way to benefit from the stock market. But your job doesn’t end with just picking the right stocks. Until you book your profit, keep tracking the estimate revision trends. Otherwise, you may someday see that your stock is losing owing to negative estimate revision. Keep a close watch on the earnings estimates, which should be continuously moving higher.

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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2017. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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